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February Newsletter - 2019

Estimated reading time: 11 minutes 51 seconds

KNOWLEDGE - NARROW FRAMING BIAS

Symptoms - Insistent focus on the performance of individual securities, looking at individual asset class performance in isolation.

Example - Gold which is used to diversify the risk involved in high equity allocation is considered a bad decision once the equity part has performed good without considering that gold was a part of the portfolio and is looked in isolation on the basis of returns.

Effect - A narrow framing bias leads to frequent exits or lower investments in individual securities/funds when there is a short term loss. Similarly, a narrow framing bias in the case of a positive performance in an individual security might lead to skewing asset allocation to the positive performing security.

Correcting the Bias - A narrow framing bias increases sensitivity to losses without considering the weightage of the loss to the overall portfolio. A step to avoiding the bias and its effect on the investor psyche is to evaluate the recommendations and its performance at the portfolio level. A wider frame on both time and weightage will create a lower sensitivity to accept losses on individual securities or temporary short term losses. In other words, too frequent portfolio monitoring is adopting a narrow time frame and a sensitivity to individual security performances is adopting a narrow weight frame. Avoiding both leads to correction of the narrow framing bias.

FINANCIAL NEWS

Blackstone and Embassy Group are likely to launch India's first real estate investment trust (REIT) with an issue size of Rs.5,000 crore. The proposed REIT will consist of the JV's 33 million sq. ft. of office and hospitality assets comprising of seven business parks and four city-centric buildings spread across Mumbai, Bengaluru, Pune and Noida. Out of 33 million sq ft, about 24 million sq ft area is operational at 95% occupancy and yielding rental income of over Rs.2,000 crore annually. Another 3 million sq ft area is under construction and 6 million sq ft area is in pipeline.

According to a recent report by Lloyd's of London, India has the second largest insurance gap in the world of $27 billion (in absolute terms) after China, where the under-insurance or insurance gap is over $76 billion. The IRDAI chief said that insurance penetration in India is about 3.7% of the GDP as against the world average of 6.31%.

The Securities and Exchange Board of India (SEBI) is planning to change the model and the payment mechanism related to the credit rating business. The regulator wants to scrap the issuer-pays model that's prevalent across the world and move to an investor-pays model. Many times, the issuer pays a huge fee to rating agencies because of which the rating agency rarely downgrades the issuer. As per the proposed new model, an issuer files a draft prospectus on the exchange, then the rating agency will assess and rate the paper which the prospective investor can pay and see the ratings.

The finance ministry has directed the Securities and Exchange Board of India (Sebi) to submit proposed regulations to an independent committee for vetting before they are passed by the regulator's board. The ministry has not mentioned details on the composition of the committee and has not yet appointed the independent members and no communication on this front has come from the ministry.

Market Regulator SEBI wants to change the calculation methodology for exposure margins for futures and options and make it tuned to the risk profile of the stocks. Sebi will also consider limiting the availability of option strike prices that are far away from the day's index or stock levels during the expiry day. The move is aimed at preventing traders from placing bets in option strikes that are far away from the existing levels.

Beneficial nominees & Married woman's property (MWP) ACT 1874

Nomination means that the nominated person is the recipient of the proceeds from the insurer. In other words, a nominee is merely a receiver of the proceeds of the Insurance Policy on the behalf of the legal heirs of the policy holder. In the case of legal heirs being more and different to the nominee, then the insurance proceeds can be called for claim by the heirs. Nominees under the beneficiary nominee category ensure that the nominees mentioned under the category remain the final receipients of the insurance proceeds. Under this category, it becomes easy for the policyholder to mention multiple beneficiaries and their respective share in the proceeds. The beneficial nominees can be changed during the life of the policy holder due to certain situations. However, in case of money due from the policy holder to creditors and in cases where legal heirs stake a claim, the beneficial nominees rights will be superseded. Under section 6 of the MWP Act, an insurance policy on the life of a married man mentioned clearly to be for the benefit of his wife and children, shall be deemed to be a trust for the benefit of wife and children. No other family member or heirs and creditors can lay a claim on the policy benefits. A widower and a divorcee can name his children as beneficiaries under this Act. Overall, only the wife and children can be named as beneficiaries and therefore no other family member or any other heir can lay a claim to the policy benefits. An MWP addendum needs to be filled while applying for insurance and the policy becomes a quasi property in favour of the nominees under the MWP Act. The benefit is available only at the start of the policy. The policy holder has no right on the survival benefits. Once the policy is endorsed under the MWP Act, there cannot be any modifications.

WHERE THERE IS A WILL, THERE IS A TRUST

Benefit of a will for a trust - A family trust can be created during the lifetime of the author of the trust or can be created under a Will. The former is called as a Living Trust while the latter is called as a Testamentary Trust. While a living trust means that the trust is created when the author is alive and can control the beneficiaries while the testamentary trust is pursuant to the death of the author under the execution of the Will.

Benefit of a Trust for a Will - A Will can be contested due to inter-se disputes among the legal heirs which may result in long drawn litigations defeating the very purpose for which a Will has been created. The Trust helps to provide benefits for the beneficiaries future or meeting specific needs of children, parents of kids/brothers with special needs.

A testamentary trust is revocable till the testator is alive and immediately becomes irrevocable upon the death of the testator. Life always has a probability attached to it. Therefore the situation of not being alive has to be assessed. More importantly, the normalisation of life for the loved ones and the use of corpus in an efficient way after the event should be planned before the eventuality. Therefore, a Will is important. However, the flow of funds needs to be designed. The right persons who can be trusted to execute the plan should be decided. A trust creation helps in the timeline and quantum of fund flow needed at various stages in the life of the loved ones.

Key considerations in forming the trust

  1. Identification of assets including insurance that will be part of the transfer to the trust
  2. Deciding the purpose for which the income/assets will be utilised and timeline if applicable
  3. Deciding the right trustee amongst the family members/friends, protector, beneficiaries and their requirements
  4. The extent of control on the trust assets by the provider
  5. Appointing a corporate trustee to ensure better and non-biased execution, besides the fact that a corporate trustee has a longer survival chance than an individual.

DOMESTIC ECONOMY

Inflation at the retail level as measured by the Consumer Price Index (CPI), has fallen to 2.05% in January 2017. The CPI was as high as 5.21% in December 2017. The 2.05% recorded in January 2019 is the lowest over 19 months.

The WPI has also seen a decline to almost similar levels amidst higher volatility to 2.76% in January 2019 from a level of 3.08% in January 2018. The main reason why inflation has been falling is the drop in global oil prices which after rising to average $80 a barrel in October last year, have fallen to $59 a barrel in January 2019.

Exports rose 3.74% to $26.3 billion in January while imports were stagnant with a meagre 0.01% rise to $41.09 billion, leaving a trade deficit of $14.7 billion compared with $15.7 billion in the year-ago period and $13.08 billion in December 2018.

India's fiscal deficit touched Rs.7.7 lakh crore ($108.36 billion), a 121.5% of the budgeted target for FY19 for the first 10 months from April till January'19 as per government data.

The Reserve Bank of India reduced the repo rate by 25 basis points on the 7th of February. The new repo rate now stands at 6.25% from the earlier 6.50%. The repo rate is the interest rate at which the central bank lends short term money to banks.

The government's push to provide clean cooking fuel to every household has turned India into the world's second largest LPG consumer whose demand is projected to rise 34 % by 2025

The GST collections in January rose to Rs.1.02 lakh crore, the second highest monthly mop-up after April. The December tax collection was at Rs.94,725 Crores. The January collection was only the third time in FY19 where the monthly collection crossed 1 lakh crore. The Government had set a budgetary threshold of Rs.1 lakh crores per month for FY19.

The Interim Budget presented by the Modi Government has presented 3 important monetary support to the economy totalling up to Rs.1 lakh crore. Rs.75,000 crore support to farmers with land holdings of up to two hectares, Rs.20,000 crore tax rebate to individuals having annual income up to Rs.5 lakh and 25% hike in the Standard Deduction for salaried individuals to Rs.50000 is likely to leave Rs.1 lakh crore in the hands of these individuals/families, providing a boost to consumption. However, on the flip side, the projections for the GST collections at an 18.3% increase over FY19 figures and a flat net borrowing figure for the next fiscal is high on optimism and may get challenged.

India's GDP is expected to grow 7.3% in FY19, and 7.5% in FY20 and 21 as per the World Bank's forecast. India will continue to be the fastest growing major economy in the world while China's economic growth is projected to slow down to 6.2% each in 2019 and 2020 and 6% in 2021, as per the January 2019 Global Economic Prospects report released by the World Bank. In 2018, the Chinese economy is estimated to have grown by 6.5 per cent as against India's 7.3%.

SECTORAL & COMPANY NEWS

The Competition Commission of India (CCI) has given a go-ahead to Reliance Industries Ltd (RIL) to acquire majority stakes in DEN Networks and Hathway Cable & Datacom for a total of Rs.5,230 crore. RIL is acquiring 66% stake in DEN Networks for Rs.2,290 crore and 51.3% in Hathway Cable for Rs.2,940 crore, totalling Rs.5,230 crore thus getting RIL access to 24 million existing cable-connected homes of these companies across 750 cities, thereby covering around half of its target of connecting 50 million homes across 1,100 Indian cities.

The National Company Law Tribunal has approved the merger of loss-making telecom firm Tata Teleservices with Bharti Airtel, according to an exchange filing on Monday. The merger is subject to the approval of the Department of Telecommunications (DoT).

India replaced Japan as the world's second-largest steel producing country, while China is the largest producer of crude steel accounting for more than 51 % of production, according to the World Steel Association.

Passenger air traffic rose 18.8% in 2018 as almost 14 crore people flew within the country. The traffic in 2017 was 11.7 crore. Incidentally, December 2018 saw 1.3 Crore people travelling, recording the highest ever the number of domestic air travel in a month.

The National Company Law Appellate Tribunal (NCLAT) has approved the proposed resolution plan by the new board of IL&FS. According to the IL&FS resolution framework report, the board has classified IL&FS companies based on their ability to meet payment obligations over the next 12 months. "Green", "Amber" and "Red" are the resultant categories of companies. "Green" companies are companies that can pay all payment obligations, "amber companies" are companies that are only able to meet operational payments and senior secured debt obligations and those that are unable to meet obligations to even senior secured financial creditors are categorised as "red companies". According to the end-December portfolio details as per Morningstar India, Debt MFs have lent to seven IL&FS firms with a total lending value of Rs.2,036.1 crore out of which Rs.1,894.8 crore is in firms listed in the "amber" category, as per a Business Standard analysis. Debt fund managers have said that they are hopeful of the repayments being senior creditors but lack clarity on the timeframe by which the repayments would initiate.

INTERNATIONAL NEWS

US Fed committee unanimously agreed at their first two-day policy-meet of 2019 to keep the federal funds rate at a range of 2.25% to 2.5%. Jerome Powell, the Fed chairman, said that the decision of not pressing ahead with a rate hike was primarily due to concerns on the slowdown in China and Europe, ongoing US-China trade tensions and, a protracted government shutdown and not due to concerns about the US economy.

U.S. home sales in December fell to their lowest level in three years and house price increases slowed sharply, suggesting a further loss of momentum in the housing market. The National Association of Realtors (NAR) said existing home sales declined 6.4 % to a seasonally adjusted annual rate of 4.99 million units.

China's economy grew at 6.6 % in 2018, its slowest rate in almost three decades as the world's second-biggest economy grappled with the effects of the current trade war with the US and declining exports. In the three months to December, the economy grew 6.4 % from a year earlier, down from 6.5 % in the previous quarter.

The Nikkei Japan Manufacturing PMI declined to 50.3 in January 2019 from 52.6 in the previous month as per final data, while the Caixin China General Manufacturing PMI fell to 48.3 in January 2019 from 49.7 in December.

Eurozone businesses expanded at their weakest rate since mid-2013 at the start of the year as demand fell for the first time in four years. The IHS Markit Eurozone Manufacturing PMI was confirmed at 50.5 in January 2019, down from 51.4 in December 2018.


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